Core Capital Management & Research Blog

Moneyball and Your Investments

Moneyball

One of my favorite parts from Moneyball is the scene where Brad Pitt is in the room with all the scouts discussing prospective players. He is annoyed over the team’s financial limitations and has come to the realization that if he keeps doing things the old way he is going to keep getting the same results. In a way, we see the scene through his eyes as we listen to the old scouts, set in their ways with decades of experience, give their “expert opinions” on the next great ballplayer. “He’s got a baseball body.” “The ball really ‘pops’ off the bat.” And my personal favorite, “He’s got an ugly girlfriend. That’s a sign of low confidence.”

When Brad Pitt asks a simple question, “Can he hit?” The answer is “Well, he’s got a beautiful swing.” Followed by more nonsensical subjective statements. Brad Pitt doesn’t relent and follows up with “If he’s a good hitter, why doesn’t he hit good?”

Scouting in the Investment World

So why am I bringing this up in a blog about finances and investing? Well, think about your last conversation with your broker, or just turn on the TV and listen to the talking heads. You can replace these scouts with the TV investment experts and hear the exact same conversation! “This company is poised to explode!” But what is it based on? In reality, its based on speculation, intuition or “gut feelings.” But that’s not what they will say. The answer they will give is “I know from experience.” Let’s go back to the Moneyball scene. What is the response from the scouts to Pitt’s explanation that gut feelings just aren’t going to cut it? “We have a lot of experience in this room. Just trust us! …We’ve been doing this for a long time.” Later in the movie, Brad Pitt puts the scout in his place when he says “You don’t have a crystal ball…. You’ve told those parents ‘when I know, I know.’ And you don’t!”

Someone needs to tell this to the investment “experts.”

What should we do?

So, if we can’t rely on experience and intuition, what should we do? What did baseball do? They went to the data! We have decades of data on businesses and stocks to learn from. While any sane (and compliant) financial advisor will tell you, history is not a predictor of future events, surely we can learn from it though.

Evidence-Based Investing

Its called Evidence-based Investing. We aim to eliminate the subjectivity of speculation, emotional bias and noise and replace it with data and research. Analyzing decades worth of data can provide evidence of factors that have been shown to drive returns across all market cycles. Using this information, decisions can be made based on data, and not “gut feelings.” Evidence-based investing provides clarity and transparency to the client. Do you know why you have the investments you have now? What purpose does each holding serve? Why were they chosen, when will they be sold? In an evidence-based portfolio, each holding has a clear purpose. There is a disciplined strategy that is followed and every decision is backed by data and research and not just so called “expertise.”

With evidence based investing, we don’t care if the stock is the darling of all the talking heads or if it has an ugly girlfriend. We care about how it measures up to the clearly defined selection process based on 50 years of data and research.